30 Sep 2011

English talks with banks after NZ credit downgrades

11:17 pm on 30 September 2011

Finance Minister Bill English has told the country's top bank economists he believes the effects of downgrading New Zealand's credit rating will be relatively minor.

Mr English took the unusual step of holding a conference call with the economists late on Friday afternoon following downgrades by two of the world's top agencies Fitch Ratings and Standard & Poor's.

On Friday morning, Fitch lowered the credit rating by one notch to AA, citing New Zealand's rising debt and persistent and widening current account deficits.

Standard & Poor's downgraded the country's rating one notch from AA+ to AA in the afternoon, saying New Zealand's external debt is set to worsen and comes at a time when the Government's financial position has been weakened by earthquake-related spending.

The third major ratings agency, Moody's, has New Zealand on a AAA rating.

One economist who took part in the call said Mr English used it to voice his opinion that the impact on New Zealand following the unexpected downgrades will be relatively minor.

He said the Finance Minister conceded that the ratings cuts meant the Government would have to do more to convince investors that New Zealand is still a good place to put their money.

The economist said Mr English appeared to rule out the use of what the minister called gimmicks - such as making superannuation scheme KiwiSaver compulsory - as a way of reducing the country's debt and improving New Zealand's standing with the agencies.

Instead, he said the Government would focus on raising New Zealand's competitiveness.

Bank economists were told on Friday morning that Mr English wanted to talk with them.

One economist said it was highly unusual for the Finance Minister to hold a co-ordinated call with all of the banks' chief economists. Another said they had been told to keep word of the conference call from colleagues, including those on the banks' trading floors.

Dollar down

The New Zealand dollar fell below US77 cents immediately after the first downgrade announcement and later in the day was buying US76.48 cents.

Westpac currency strategist Imre Speizer said this reflects the expectation that some investors will pull money out of New Zealand following the downgrade.

The interest rate on Government debt rose by almost 0.1 of a percentage point after the first downgrade announcement.

Ratings agencies' comments

Fitch Ratings says New Zealand's high level of net external debt is an outlier among rated peers.

It said debt is likely to persist as the current account deficit is set to climb to 4.9% of gross domestic product next year and 5.5% in 2013. It said the current account deficit reflects a structural imbalance between savings and investment.

Fitch noted that New Zealand has one of the highest levels of household indebtedness among developed countries at 150% of disposable revenue, which has not declined significantly since 2008.

The agency added, however, that New Zealand remained well placed among the world's highly rated sovereign credits, with its creditworthiness supported by moderate public indebtedness, fiscal prudence, and strong public institutions. The outlook on the new rating is stable.

Standard and Poor's spokesperson Kyran Curry says New Zealand debt levels are simply too high.

Mr Curry says while other sovereign states such as Australia also rely heavily on imported capital, it mostly goes towards sectors such as mining sector while in New Zealand less flows into the productive sector and most into into property and consumption.